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Engineering scheme introduces real assets portfolio, targeting €2.5bn

PME, the Dutch industry-wide pension fund for metalworking and electro-technical engineering, has introduced a dedicated allocation to real assets and will invest 5% of its portfolio.

In its annual report for 2018, it said the new asset class would replace its current alternatives portfolio, which comprised a 1.6% combined stake in forestry and infrastructure.

Based on its current portfolio size of €50bn, the real assets portfolio could reach €2.5bn.

The scheme – one of the largest in the Netherlands – said it also planned to reallocate away from equities and add to its illiquid holdings. It currently has 33.8% of its investment portfolio in equities, and 22.5% in illiquid assets.

In addition, PME has increased its stake in residential mortgages by €425m to 5.5%, as well as raising its allocation to Dutch residential property by €86m, with an additional €142m in the pipeline.

The metal scheme committed €550m to private equity during 2018, €100m short of the scheme’s planned increase, which it said was due to “valuations of the asset class”.

It also halted an intended expansion of its 17% allocation to investment grade credit as the spread over government bonds was too narrow.

PME’s investment portfolio lost 0.9% in 2018, largely because of losses incurred from equity investments (down 6.9%) and alternatives (down 0.9%).

Its 4.7% real estate holdings – of predominantly Dutch residential property and low-risk European real estate – returned 12%, while fixed income gained 1.7%.

PME exceeds carbon reduction target

Meanwhile, PME said it had made good progress towards its environmental, social and governance (ESG) goals and had already exceeded its 25% carbon reduction target relative to 2015, by 3 percentage points.

At the end of 2018, 8.8% of its investments contributed to the UN’s Sustainable Development Goals (SDGs), PME reported. It wants to hit 10% of investments by 2021.

The scheme added that €972m of its assets contributed to the energy transition and access to affordable housing in the Netherlands. It has set aside an additional €250m for this purpose.

Last year, PME introduced a best in class strategy, aimed at divesting the worst-performing companies with regards to climate change. It has fully excluded firms solely involved in coal.

Along with its €77bn sister scheme PMT, PME has been engaging MN to achieve “sustainable pensions provision” by steering the provider’s strategy. MN is asset manager for both schemes.

PME said it still considered joining PMT as an “attractive scenario”, but emphasised that a merger would not be on the cards soon.

The scheme – also known as “Metalectro” – reported a reduction of administration costs by €12, to €120 per participant. Asset management costs rose by two basis points to 37bps due to higher management fees for its 2.2% private equity allocation, which had returned almost 12%.

Cuts

Like PMT, PME is also facing rights cuts next year if its funding ratio hasn’t improved to at least 104.3% at the end of 2019. Its funding stood at 100.6% at the end of March.

In its annual report, the pension fund said it estimated that there was a 27% chance of cuts of 5-10% of pension rights and benefits.

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